Which type of bonds are needed to add convexity in a bond strategy?

Longer-maturity securities are associated with greater convexity because of their sensitivity to interest rate changes over time. Convexity refers to the curvature in the relationship between bond prices and interest rates, which means that longer-maturity bonds will typically exhibit more price sensitivity when interest rates change.

When constructing a bond portfolio, incorporating longer-maturity bonds can enhance the portfolio's convexity. This enhancement is beneficial especially in environments where interest rates are fluctuating, as it can lead to better performance of the bond portfolio compared to a portfolio with only short- or medium-term securities. The longer time to maturity allows these bonds to have a more pronounced non-linear price response to interest rate changes, making them a valuable addition in strategies designed to manage interest rate risk effectively.

In contrast, short-term and medium-term securities generally do not provide as much convexity due to their shorter duration, which limits their sensitivity to interest rate changes. Zero-coupon bonds, while they do provide a high degree of convexity due to their structure, are not necessarily connected to the concept of maturity length in the same way as longer-maturity securities. They can create a high level of price fluctuation but are primarily used for specific strategies rather than broadly enhancing portfolio convexity in the